This chapter addresses SEC Marketing Rule 206(4)-1 compliance for emerging asset managers raising Fund I or II in 2025-2026. The Private Fund Adviser Rules were vacated June 5, 2024, but the Marketing Rule remains fully enforceable with increased SEC examination activity.
The Landscape Shift
Private Fund Adviser Rules
The Fifth Circuit vacated the 2023 private-fund rule package entirely on June 5, 2024. The SEC chose not to seek rehearing. Managers should retain operational infrastructure (reporting templates, fee breakouts) but present these as voluntary LP reporting rather than regulatory requirements. Some LPs will still request vacated disclosures because they've built processes around them.
Marketing Rule Status: "Advisers Act Rule 206(4)-1 has been fully in effect since Nov 2022 and was a top priority in 2024 exams." The April 2024 Division of Examinations Risk Alert flagged recurring deficiencies: gross/net prominence, weak controls over hypothetical performance, missing testimonial/rating disclosures, and poor substantiation. In September 2024, the SEC charged nine RIAs over Marketing Rule violations, signaling ongoing enforcement priorities.
Common Examination Focus Areas
- Performance presentation: Side-by-side gross/net for identical periods
- Testimonials/endorsements: Required disclosures on client status, compensation, conflicts
- Case studies: Representative selection; documented role and results
- Substantiation: Immediate access to spreadsheets, benchmark memos, source documents
Why Emerging Managers Face Greater Pressure
Smaller teams have thinner documentation and loose version control across materials (decks, websites, emails, data rooms). The rule is format-agnostic, expanding compliance surface area.
Solution: Create a Performance Compliance Memo that deck footnotes reference; prepare Benchmark Selection Memos for every index; maintain Testimonial/Rating files with original text, consent, compensation, and conflicts; establish a /204-2 Substantiation folder with all workpapers.
Performance Presentation Rules
Gross vs. Net, Equal, Adjacent, Identical Scope
Core Requirement: If gross appears anywhere, net must appear right next to it for the same period using the same calculation method, with equal prominence. Equal means: same slide/screen, identical font size and weight, visually comparable placement. Do not tuck net into footnotes, appendices, or hyperlinks—these fail the prominence test.
Design Controls
Build a slide master locking two fields side-by-side ("Gross" and "Net") with identical styling. Disable single-metric callouts for IRR or MOIC unless the paired metric is present. Add a pre-send "Gross/Net parity" QA check to marketing workflows.
Extracted/Single-Deal Results
When showing a carve-out (one deal, strategy sleeve, or "Fund I seed bucket"), label it "extracted performance" and include (or cross-reference on the same page) the total portfolio's gross and net for the same period. Add one plain-English line explaining why the extract is informative (e.g., illustrating a specific thesis or playbook).
Footnotes That Help, Not Hide
Clearly state whether fees, fund expenses, and carry are included. If net is pro forma, spell out assumptions (e.g., "2%/20%, 8% pref, admin/audit costs included").
Composites & Carve-Outs
Prepare a 2-3 page Composite Methodology Memo covering:
- Inclusion/exclusion rules: Which accounts, which deals, treatment of partial exits, write-offs, co-invest sleeves
- Weighting: Time-weighted vs. money-weighted returns; rationale for the choice
- Netting assumptions: Fee base, carry waterfall (American vs. European), included expenses
- Outliers & dispersion: Treatment logic; simple dispersion stat (e.g., interquartile IRR range)
On every composite-using slide, include a one-line summary: "Composite = all Fund I seed checks 2024-2025; time-weighted; net assumes 2/20 with fund expenses." Keep the spreadsheet implementing the methodology in workpapers with visible formulas and version stamps.
Hypothetical Performance
Anything modelled, back-tested, or targeted is hypothetical and requires controls:
- Audience control: Restrict distribution to sophisticated recipients (e.g., LP prospects). Do not post targets or back-tests on public webpages.
- Labeling: Watermark or prominent header stating "Hypothetical"; include criteria, assumptions, risks, and limitations on the slide itself (not in appendices).
- Process: Name an owner for the model, maintain a change log, store the workbook (inputs, formulas, data sources, sensitivity tables) for examiner access.
Benchmarks
If comparing to an index or peer set, pass the appropriateness test:
- Fit: Strategy, sector, stage, geography, liquidity, leverage, and fee basis should be reasonably aligned. If no index fits perfectly, explain why the choice is least misleading.
- Disclosure: Specify price vs. total-return, currency/hedging, and any material differences (e.g., "benchmark includes later-stage growth; we invest seed/Series A").
- Memo: Keep a one-page Benchmark Selection Memo per index explaining rationale, data vendor, and limitations. Reference it in a small slide footnote.
Avoid opportunistic benchmark switching. If changing, disclose when and why, showing overlap so readers can reconcile history.
Material Modifications
If significant changes occur (new lead PM, thesis pivot, leverage policy overhaul, process changes), prior results may not be comparable. Don't roll them together as if nothing changed.
- Presentation fix: Split pre-/post-change periods; add a banner note (e.g., "Strategy broadened to growth in Q2-2025"); consider showing both legacy and current composites.
- Narrative fix: Briefly explain what changed in sourcing, underwriting, or value-creation and why it matters to future returns.
QA Workflow
Before deck or website updates go live, run Marketing Rule QA:
- Parity check: Gross and net side-by-side, same periods/methods, equal prominence
- Labels: "Extracted," "Hypothetical," "Pro forma" clearly marked; fee/expense/carry mechanics in plain English
- Workpapers: Spreadsheet producing each figure, Composite Memo, Benchmark Selection Memo, model workbook for hypothetical stored and versioned
- Distribution record: Who receives which version and when (for issuing corrections if needed)
Template Language
- Slide footer: "Gross and Net calculated using identical methodology; Net reflects 2% mgmt fee, 20% carry, and fund expenses; see Performance Compliance Memo §2."
- Extract label: "Extracted performance: single-deal illustration. See page X for total portfolio Gross/Net and dispersion."
- Hypothetical banner: "Hypothetical/Targets, not based on actual investor experience; assumes 2%/20%, reserves 1.25x, 30% loss ratio; distribution limited to professional investors."
Testimonials & Third-Party Ratings
Testimonials & Endorsements
The Marketing Rule permits testimonials/endorsements but requires:
- Disclosure that the promoter is a client/investor
- Disclosure of whether they are compensated
- Identification of any material conflicts
- Provision of (or offer to provide) disclosures so prospective investors understand context
- Oversight (e.g., pre-approval or posted-content controls)
Third-Party Ratings
For ratings from providers like Preqin or Cambridge Associates:
- Ensure eligibility under the provider's stated methodology
- Disclose the criteria, time period, and whether payment was made for the rating or distribution
- Avoid cherry-picking award logos without context
- The September 2024 sweep charged firms touting ratings/testimonials "without required disclosures."
Cherry-Picking & Typicality
If selecting a few deals or quotes, explain why these are selected and how typical they are. If not representative, state so plainly. Maintain selection logic in files (e.g., "top 5 by realized MOIC; also showed loss case").
Attribution
Identify the source: "Testimonial from LP in Fund I (uncompensated)" or "Founder of Company X (portfolio company; not an investor)." State any compensation or non-cash benefits.
Case Studies & Track Record
Selection Discipline
Decide how examples are picked before writing them (e.g., "one win, one base, one loss from investments made 2023–2025"). Write a short Case Selection Rationale (1 page): population considered, filters applied, why the chosen set is representative of outcomes and holding periods. If only winners are shown, say so plainly and note results aren't representative of all investments. Keep the rationale in /204-2 Substantiation folder.
Angel vs. Fund Outcomes
Angel activity evidences domain judgment but is not fund performance. Present angels in a separate section with its own label and disclaimers. Avoid composite charts mixing angel and fund metrics. If an angel deal later entered the fund via SPV, explain the timeline and conflict controls.
Net vs. Gross at Deal Level
When quoting MOIC/IRR, specify Gross (pre-fees/carry) or Net to fund/LPs, and how net was derived (actual vs. pro forma with stated assumptions). Align period and methodology with fund-level performance. If presenting extracted results, point to total portfolio gross/net in the same package and explain why the extract is informative.
Exam-Ready Format
Use a one-page template per deal: Company; Entry date/stage; Check + ownership; Thesis wedge; Underwriting tests; Dated interventions; Outcomes (KPIs with dates); Counterfactual; Data sources; Net/Gross label. Include one base and one loss case alongside a win. This reads as judgment, not gloss, and provides exam staff and LP ICs expected context.
Books & Records (Rule 204-2): Build an Exam-Ready Archive
What to Keep
- Performance workpapers: Source data (by deal/fund), versioned spreadsheets with visible formulas, fee/carry and expense assumptions, pro-forma steps converting gross to net. Export PDF snapshots with timestamps when numbers change.
- Composite/carve-out methodology: Short memo defining inclusion/exclusion criteria, time- or money-weighting, net computation for composites and extracts; link to affected marketing pages.
- Hypothetical performance files: Models (targets, back-tests), key assumptions and criteria, distribution policy (who receives), audience controls (not posted to website).
- Benchmark selection memos: One pager per index—rationale, material differences (sector, leverage, liquidity, currency), data source, look-through limitations.
- Testimonials/ratings files: Original quotes/screenshots, consents/agreements, compensation or non-cash benefits, conflict analysis, final formatted snippet used in materials.
- Marketing approvals: Workflow log for deck/teaser/site/email—preparer, reviewer (compliance/partner), date, redline summary of changes.
- Distribution lists: Who received which version and when (useful for corrective communications).
Red Flags
Gross Without Net (Equal Prominence): If a slide shows bold gross IRR/MOIC and net appears in footnote, smaller font, or separate appendix, this is a fail. Fix: place gross and net side-by-side for same periods, same methodology, same font size. Establish a deck-level rule: "No gross figure may appear unless the adjacent cell displays net."
Hypothetical Performance Without Controls: Targets, models, and back-tests shown without clear labels, assumptions, and audience limits are high risk. Fix: watermark slides "Hypothetical," list key assumptions (fees, leverage, vintage/market regime), document distribution rule (e.g., "LP prospects only; not on website"). Keep spreadsheet and change log in substantiation folder.
Cherry-Picked Winners Without Context: Two or three standout deals portrayed as typical, without base or loss example, reads as misleading. Fix: present representative set (win/base/loss) or state plainly examples aren't representative. Include selection criteria (e.g., "top 5 realized MOIC as of Q2 2025") and add dispersion stats or cohort outcomes.
Testimonials/Ratings Missing Disclosures: Quotes or badges used without stating who gave them, client/investor status, compensation, and material conflicts draw scrutiny. Fix: attach small disclosure box beneath each quote/badge; keep testimonial packet (original text, consent, compensation terms, conflicts analysis) in files.
No Substantiation on Request: Examiners often ask for workpapers behind claims (formulas, raw data, benchmark rationale). Fix: maintain /204-2 folder tree with performance workbooks, Benchmark Selection memos, hypothetical-performance models, testimonial/ratings packets, versioned approvals, distribution lists.
Quarterly Red-Flag Scrub
Run across deck, website, one-pagers, emails, and data room:
- Checklist: Gross/net parity, hypothetical labels, case-study representativeness, testimonial disclosures, link-back to workpapers
- Ownership: Assign partner + compliance owner; 10-day SLA to remediate gaps
- Version control: Freeze PDFs, log distributions, archive superseded materials
Practical Compliance Playbook
A seven-piece toolkit emerging managers can implement in one week, each mapped to ILPA room structure:
1. Performance Compliance Memo
4-6 pages documenting: gross and net calculation, fee/carry assumptions, composite/carve-out rules, hypothetical performance handling, pre-release QA process. Tie deck footnotes to memo sections.
2. Benchmark Selection Memo
One pager per benchmark: appropriateness rationale, material differences, known limitations, data source links. Keep current.
3. Marketing Review SOP
Flowchart: draft → compliance review → partner sign-off → versioned PDF to /204-2 Marketing/ → distribution list logged. Include gross/net prominence and testimonial/ratings disclosure checks.
4. Testimonial & Rating Packets
Per quote/rating: original text, signed permission, compensation terms, context (client/investor status, conflicts), final formatted version. Map to slide locations.
5. Case Study Methodology Note
Spell out selection rules (win/base/loss), standard headings (thesis, intervention, outcome), whether figures are gross or net. Store workbooks and IC memos supporting narrative.
6. Hypothetical Performance Controls
Policy limiting when/where targets/back-tests are used, required assumption display, intended audience. Include example disclosures to paste into slides.
7. Version Control & QA Checklist
Document sign-off, approval logs, and remediation tracking.
EU Parallels (MiFID II / ESMA) for Cross-Border Managers
If marketing an AIF into the EU (passport or NPPR), assume regulators judge materials against MiFID II/ESMA principles: communications must be "fair, clear and not misleading," especially on performance and sustainability.
ESMA 2024 Pan-EU Review Findings
Process compliance was broadly adequate, but examiners flagged:
- Exaggerated statements
- Unclear comparators
- Weak evidence behind ESG claims
The EU is less prescriptive than the SEC on gross/net formatting but still expects documented basis for comparisons, balanced risk wording, and governance trails (approvals, timing).
Make EU Pack Pass Sniff Test
- Performance & comparisons: State why an index or peer set is appropriate; include time period, currency/hedging, material differences (leverage, sector mix). Present downsides (volatility, drawdowns) alongside upside.
- Sustainability/ESG: Tie any ESG or impact claim to evidence (data source, methodology, scope). If referencing SFDR (Article 6/8/9) or PAIs, align wording with disclosures; avoid stretch statements.
- Risk and prominence: Place key risks (liquidity, valuation, concentration, leverage, currency) near related claims, not buried. Use legible fonts and equal prominence for caveats attached to charts/graphics.
- AIFMD Article 23 alignment: Ensure marketing deck doesn't contradict mandatory AIFMD investor disclosures (strategy, fees/expenses, valuation, liquidity, leverage limits, side-letter treatment). Keep an Article 23 cross-walk in files.
- Local rules & language: NPPR means country-by-country nuances (notifications, legends, language, retail access bans). Maintain an NCA matrix (what was filed, when, who approved, required legends).
- Personal data & testimonials: If naming founders/LPs, meet GDPR basics (consent/use rights) and disclose material relationships; avoid implying typical outcomes.
- Retail touchpoints: If ever touching retail (e.g., ELTIF), expect KID/PRIIPs and enhanced appropriateness/suitability and cost disclosures; build these with admin/distributor.
Dual-Marketing (US + EU) Strategy
Set a single high bar:
- Use U.S. Marketing Rule package (gross/net parity, hypothetical labeling, testimonial/ratings disclosures, workpaper substantiation) as default.
- Add a 2-page MiFID II alignment note to Marketing SOP covering: "fair/clear/not misleading" test; comparator evidence; ESG claim substantiation; country-specific NPPR/legend requirements; Compliance/Legal sign-off.
- Keep EU approvals binder (NCA notices, translations, legends) and version log proving exactly which deck went to which Member State, when, under which regime.
This ensures EU materials read as professional, consistent, and exam-ready without maintaining a divergent marketing stack.